American Vanguard Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in USD millions unless noted. American Vanguard sells crop and non-crop products and reports one operating segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $147.3 | $117.4 | $398.1 | $318.0 |
| Gross profit / margin | $57.1 / 39% | $43.3 / 37% | $154.3 / 39% | $122.0 / 38% |
| Operating income | $8.9 | $4.2 | $21.6 | $12.8 |
| Net income | $5.5 | $2.9 | $13.7 | $7.3 |
| Diluted EPS | $0.18 | $0.10 | $0.45 | $0.25 |
| Net cash from operating activities | Not separately presented for the quarter | $(0.2) | $20.4 |
- Q3 sales grew 25%, operating income 112%, and net income 88%. Nine-month sales grew 25% and net income 87%.
- Q3 U.S. sales increased 33% and international sales 16%. Nine-month U.S. sales rose 31% and international sales 17%. Growth reflected stronger agricultural markets, commodity prices, product demand, and contributions from acquired businesses.
- Q3 gross margin expanded to 39% from 37%, supported by product mix and improved factory performance. For the first nine months, gross margin increased to 39% from 38%, though factory cost recovery was weaker year over year.
- Operating expenses rose 24% in Q3 and 22% year to date, including acquisition-related costs, higher incentive compensation, product development and legal expenses. Nine-month interest expense declined to $2.9 million from $3.8 million; the effective tax rate rose to 27.4% from 20.0% per the financial statement note. MD&A gives a different 2021 year-to-date rate of 27.7%.
Financial position and liquidity
- At September 30, cash was $16.7 million, total assets $735.9 million, and current assets $376.3 million versus current liabilities of $178.3 million.
- Net long-term debt was $136.3 million, up from $107.4 million at year-end 2020. The revolving facility was amended in August 2021, extends to August 2026, and provides a $275 million line plus an accordion feature of up to $150 million. The stated borrowing capacity was $95.0 million.
- The company reported a 2.07 leverage ratio against a maximum of 3.5 and compliance with all credit covenants. The September 30 facility interest rate was 1.96%; borrowings carry variable rates.
- Operating cash flow was nearly break-even despite higher earnings, principally as receivables increased $43.0 million and deferred revenue fell $38.3 million; accrued program costs rose $34.0 million. Cash used in investing was $18.4 million, including a $10.0 million product-line acquisition. Financing provided $20.0 million, chiefly through additional line-of-credit borrowings.
- Management stated that operating cash flow, cash on hand and available facility borrowings should be sufficient for liquidity needs over the next 12 months.
Notable changes, outlook and risks
- Management attributed the quarterly improvement to agricultural recovery, stronger commodity prices and demand, higher-margin sales and improved factory activity. It provided no specific forward financial guidance.
- Supply-chain and logistics constraints delayed some soil fumigant sales and affected regional markets. Management reported no material supply disruption to date, but cautioned that global shipping congestion, higher costs and delays could persist.
- COVID-19 had minimal reported operating impact during the period, but its future effects remain uncertain. Other stated risks include demand, weather, regulation, competition, foreign exchange, product commercialization and supply constraints. The company does not hedge its foreign-currency exposure.
- A DOJ/EPA investigation concerns alleged FIFRA, RCRA, obstruction and false-statement violations. The company said the government’s evidence does not allege harm to human health or the environment, but potential remedies include fines, injunctions and compliance monitoring. Outcome and timing are uncertain; no loss contingency was recorded, and an adverse outcome could materially affect the business.
- A September 2021 EPA consent order resolved alleged Clean Air Act violations at the Axis facility for an amount described as immaterial. A $672,000 Agrinos PPP loan forgiveness was recognized as other income. The company also recorded a $399,000 impairment of its Bi-PA investment and determined its Hong Kong joint-venture investment was fully impaired, recording a $288,000 charge.
- The company acquired a product line for $10.0 million in July and repurchased 300,000 shares for $4.6 million during the quarter. It continued quarterly dividends of $0.02 per share.
Investor verification priorities
- Check the year-to-date effective tax-rate discrepancy: 27.4% in the financial statement note versus 27.7% in MD&A.
- Assess working-capital conversion, especially receivables growth, the sharp decline in deferred revenue, and the timing and payment of accrued customer programs.
- Review debt capacity, variable-rate exposure, covenant headroom and the effect of acquisitions or working-capital needs on borrowing availability.
- Monitor the DOJ/EPA investigation, potential penalties or non-monetary remedies, and why no loss contingency was recorded.
- Evaluate whether supply-chain constraints, freight costs, weather and commodity-price conditions affect future sales, margins and cash flows.